New state pension top-up looks good value: Workers can spend £22,250 to boost annual retirement income by £1,300

A Government initiative allowing retirees to buy extra state pension income could prove to be good value for people when they get unrestricted access to their pension pots next year, calculations have shown.

Pensioners who want to buy themselves extra state pension under a new government initiative will have to fork out a £22,250 lump sum to get the maximum £25-a-week extra - worth £1,300-a-year - the Department for Work and Pensions has announced today.

This scheme was unveiled in the autumn statement last December, but no figures had been calculated as to what the extra pension would cost. The Government expects one in five will be interested in taking up the offer.

Worthy option? Buying extra state pension could prove attractive for those reaching state pension age before April 2016.

In an 18-month period starting from October 2015, anyone who reaches state pension age before April 6 2016 will be given the chance to buy the additional income, to make up for the fact they won't get access to the flat-rate state pension.

From next year, defined contribution pension savers will get full access to their pension pot, meaning they will no longer have to turn their savings into an annuity, and instead they can withdraw it at marginal tax rates.

But the rates being offered by the Government - £890 to buy £1 extra state pension income - are an attractive option for eligible people who still want some guaranteed income in retirement, and are far more generous than equivalent annuities.

Taking a lump sum of just over £28,000 from your private pension when restrictions are lifted - which would be around £22,400 when taxed at 20 per cent, not taking into account tax allowances - would buy extra state pension of £1,300-a-year that would rise each year with inflation.

The extra state pension comes with another benefit too - half of the additional income will continue to be paid to a spouse upon the purchaser's death automatically.

An equivalent annuity, which rises in line with inflation, pays 50 per cent to your spouse upon death and is bought with £28,000 directly from your pension, would get you an income of less than £800-a-year in some cases at current prices.

By This is Money's calculations, it could take a 65-year-old around 18 years to get their money back from buying extra state pension, whereas for an annuity it could take more than 30 years.

HOW MUCH YOUR EXTRA STATE PENSION WOULD BE WORTH AFTER 15 YRS

YEAR

EXTRA INCOME (rising at 2.5% a year)

TOTAL EXTRA EARNED

1

£1,300

£1,300

5

£1,434.95

£6,833.21

10

£1,623.52

£14,564.37

15

£1,836.86

£23,310.92

Thousands of savers have mothballed their retirement plans in the wake of George Osborne's momentous announcement that people will be given freedom with their pension pots from next April.

And if any of those qualify to buy extra state pension income and want the security of a guaranteed income, it seems to provide much better returns than most of the products currently on the market.

The top-ups are available through the creation of a new National Insurance class, Class 3A, and the cost will decrease the older you are.

The cost for a 75-year-old for example will be £674 to buy an extra £1-a-week income, or £16,850 for the full £25-a-week.

Minister for pensions Steve Webb said: 'The scheme will give them a guaranteed, index-linked return and will be particularly attractive for women pensioners who will draw the higher pension for longer.

'It will also help the self-employed, who currently qualify for only the basic state pension.'

People are able to pre-register their interest in buying the extra income by visiting www.gov.uk/state-pension-topup or by calling 0845 6004270 or 0345 6004270.